Episode 5: Simple Approach to Equity Investing

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Max Keeling: https://www.linkedin.com/in/maxkeeling/
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Welcome to the Expat Wealth Blueprint show. I am Max Keeling and this is the podcast for expats in Asia that aspire to have or already have $2 to $20 million and are looking for simple approaches for managing your money and you want to get to the lifestyle you want.  

So I’ve covered in previous episodes that I think there’s a lack of credible information out there for people that are in this $2 to $20 million bracket. And I’m hoping to impart some frameworks, some core principles that you can apply to try and get you to your life goal, which at the end of the day, is why we should be investing. 

Today I’m going to cover equities. How do you go and invest in equities? 

I’ve previously covered how to work out how much money you might need to have accumulated. Or if you’ve already accumulated a certain amount, how much could you safely withdraw out of that? I previously covered how to go and build a financial plan. Think about where you’re at now and how to go and build that plan. 

So if you’re jumping into this episode, this is episode 5 I think, go and listen to some of the others. And in the last episode, episode 4, I covered what should you invest in. So should you go down the equities route? Should you go down the rental properties route? How does that work? 

Today I’m going to cover the sexy topic of equities and give you my views on how you should maybe approach equity investing. 

Now remember the title of this podcast is the Expat Blueprint Podcast, Wealth Blueprint, and what I’m going to share with you is if you’re looking for a simple approach to go and build an equity portfolio, these are the principles you should be following. 

Also leave me a review. Leave me comments, send me comments. Anything you want me to cover in future episodes or let me know if you’re enjoying this kind of stuff. Because I’m going to be skimming the surface really, high level, but that should be enough to give you principles. But I’m sure there will be people out there who wants to go into more detail. 

So let’s go through my top tips for investing in equity markets. 

Firstly is, have the right mindset. Now what I mean by that is, don’t go and invest without a plan. I think I’ve covered this in the last few episodes, but you need to create a plan and understand what it is you’re trying to get out of investing in the markets. Do you need to be getting a high return? A mid return? A low return? And we need to be going in with that idea. So we need to understand what it is we are investing for. 

Secondly on mindset is, take it seriously. Now I know that sounds like an odd thing to say, because if you will listen to this podcast, you probably already take your money seriously. And most people do take their money seriously. But what I mean by that is, I see so many people, and we see so many people at Providend, that are investing in speculative things. Or they’re investing because the person they sit next to at work told them to invest in solar energy or cobalt prices because batteries are going to go up. 

Now, that’s fine if you want to do that, but do that as a small part of your portfolio. Your mindset has got to be that you are building your core wealth to build the wealth for your family or it’s capital preservation and we need to take this seriously. 

We need to be approaching this, not trying to make money in 1 year or 6 months. This has got to be a 10, 20, 30 years journey. So we’ve got to take it seriously. 

We take it incredibly seriously at Providend because I’m investing people’s life savings and so we’ve got to be approaching this in a way that is prudent, and that we think is a high confidence strategy. 

So many people do the planning piece, do that bit seriously. And when it comes to equity investing, they are just a little bit reckless, and they’re not taking it seriously. So we need to have this mindset of, “This is my core wealth. If I’m going to express a view of, I think Vietnam is going to be the next best country, do that totally separately”. Have it in a separate account. That’s the first bit. 

Third tip is, we just want to capture market returns. So what do I mean by that? The market return is, there’s a number of benchmarks out there, so there’re things like the MSCI World Index or there’s the FTSE All–World Index and this is an index of all of the largest companies in every single country around the world that shows if you own all of those companies, then this is the return you would have gotten over the last 30, 40, 50 years. 

Now, for most people listening to this, you just need to capture that market return. We don’t need to do better than it. In the last episode, I think I went through since 1973, the MSCI World Index has returned about 8% – 8.5% a year on average. 

If you’ve just captured that market return over the last 30 years, you would be richer beyond your wildest dreams. Honestly, for most people, because when we’re doing the planning side, and when we’ve looked at the previous episodes and you build your own plan, that should be based on very prudent assumptions. Your plan should work even if you’re getting an assumed return of 4% or 5% a year. 

If you need to be getting more than 5% or 6% a year, the reality is your financial plan probably doesn’t work. But on the investment side, if you could just harness the market return and get it, then historically that would have worked out very well for you. 

So don’t try and outperform the benchmark. So many people and especially guys, unfortunately, if you say to someone the benchmark return is X, they always want to know how they can outperform it. And there’re countless studies that show whenever you try and outperform a benchmark, especially in equities, you tend to underperform by a lot and tend to underperform over a very long period. 

So mindset needs to be, “I just want to capture market returns”. 

Now important caveat here is, I have no idea what the best investment strategy will be in the future. I don’t know what sectors are going to do well. I don’t know what companies are going to do well. I can’t predict what’s going to happen in the markets tomorrow, next month, in 5 years, 10 years, 20 years. 

But what I can do is look at what has worked over the last 50 to 100 years. Because there’re loads of academics and smart–minded people that have reviewed the data and said these are some things that have worked over all time periods, and these are things that haven’t worked over all time periods. 

If someone has been saying a certain approach has never worked in the last 50 to 100 years, it doesn’t mean it won’t work in the future. But to me that gives me a low confidence. 

What has worked in the past is just capturing market returns, over any time period has worked well. And that’s why I’m saying if you’re looking for a blueprint for your wealth, it’s just to capture market returns. 

Hopefully that’s pretty clear. 

Now, how would you actually go and do that? So there are products out there that just track the market and they are called trackers. Go and look up companies like Vanguard and iShares and they will have their stated benchmark as the FTSE All–World Index or the MSCI World Index. And really, that’s what we want to capture. To go and use tracker funds, they’re going to invest and capture these market returns. For most people listening to this, this is going to work really well for you. 

Next, we want to try and keep our costs as low as possible. So we can go and buy a tracker fund for, I would say a good benchmark is 50 basis points or 0.5%. If you go and find funds that are charging less than 0.5%, they’re probably going to be more in the tracker end. 

If you go and look at funds and they’re charging 1.5%, 2%, likelihood is that they are actively managed funds. And what that means is the fund manager is trying to outperform the benchmark. Going back to my blueprint principle, we’re not trying to outperform the benchmark, so we don’t need to be paying 1.5% – 2%. 

We do find that a lot of these funds are actually closet trackers. They should be charging you 0.2% and they’re charging 2%, so we just don’t need that. So if you can find funds that are less than 0.5%, that’s going to stand you in good stead. We’re not going to overpay for what we need, and it’s going to filter out a lot of funds as well. 

If you want to look for some specific fund recommendations, then I highly recommend checking out books by Andrew Hallam. There’s one called Millionaire Expat. There’s another one that I’m looking at, which is called the Global Expats Guide to Investing, and in there he’s got some recommended funds. They’re all Vanguard, they’re all iShares. So go and get familiar with those. 

If you’ve set yourself up an account like Saxo or Interactive Brokers, or you’ve got another platform, go and look and see whether Vanguard and iShares are on there. Go and filter them. Go and look for the global tracker funds. 

The other piece that is very important when we’re looking at tracker funds is, we want to be globally diversified. We want to own pretty much every stock on every single Stock Exchange in every single country. 

Because we don’t know what countries and companies are going to do well. So we just want to buy all of them. And again, that has worked very well over the last 30, 50, 100 years if you could have just owned all of the largest companies around the world. And that’s what that tracker is going to do. 

Now there is an advanced level of trackers, which again maybe most people don’t need, but I’ll cover it anyway. Most of these tracker funds from iShares and Vanguard really have just got the largest companies in the world. So in the U.S., it will mainly have the S&P 500 in it which is the 500 biggest companies in the U.S. In the U.K., it will have the FTSE 100, so the 100 biggest companies in the U.K. etc. 

Now for most people that will be fine, but what you are missing out on is owning all of the small and mid-sized companies in all of these countries. And historically, over any kind of 10 year period, small, mid-sized companies tend to do better than the largest companies in any country. Which kind of makes sense because if you are a small company with a GBP $50 million turnover, it’s a lot easier to grow that at 10%, 20%, 30%, 40% per year than it is if you’ve got revenues of billions. 

You could go and set up your core trackers and then you could look at adding some small and mid–size tracker funds. They do tend to be a little bit more expensive because it’s a bit harder to access those markets. They do tend to have slightly higher returns, but they are a lot more volatile. What that means is that it’s going to get a lot more variability every year in performance. 

Going back to my blueprint principle, you don’t need to go and do that. You could just have a very simple setup where you’ve got maybe 3 funds. Some of the tracker funds don’t include emerging markets. So we could have a global tracker fund plus the emerging markets equities tracker fund plus a bond fund. 

You could probably get away with 3 or 4 funds tops, and then only look at adding some of these small, mid-sized companies if (A) you know what you’re doing and (B) don’t get distracted and end up paying 2%, 3% for a fund manager that’s going to pick small companies. 

In fact, I would say if you’re interested in that small cap idea, you’re better off speaking to a professional like myself or Providend because we do have access to products that we can build. Because the risk is, you start looking at some of these sexier index fund trackers and you get carried away with what the returns are and all of a sudden you end up with two larger weighting. We’re not saying put all your money in small cap stocks. 

For most people, stick to the tracker funds, stick to keeping them low cost, make sure they’re globally diversified across all countries, all sectors. 

So we’ve covered, we need a plan. We need to have the right mindset going into this. We need to really just capture market returns. We want to try and keep our costs as low as possible, below 50 basis points would be my rough rule of thumb. 

Some of these funds are a lot cheaper than that, 0.1% – 0.2%. We could if we want to go the advanced route, add in some small, mid-sized companies. But I’d say for most people you probably don’t need to do that. 

If you could set that up and you could start investing and putting money in and building your confidence, set up some kind of annual review process to see how the funds are performing. See whether it’s in line with the goals that you’ve set, then you would have a setup that will beat most professional money managers’ setups. 

I can’t guarantee it, but that’s what has worked very successfully in the past, so we should use some of those lessons looking forward into the future. 

I hope you found that useful. In the next episode, I will cover how to think about finding bond funds. Because for most people, you’re going to need to combine the equity piece with the bond element as well. 

As I said earlier, let me know if this has been useful. Let me know if there’re other elements you’d want to go into detail on, or leave me a review, even better. The more reviews that we get on things like Apple Podcasts, the more people are going to find this podcast, and hopefully it’ll be helpful to them.